The Benefits of Diversification When Investing
In investment strategy the term diversification means to spread your funds across various financial instruments. This is a common approach to manage the risk levels of capital loss to your investment portfolio and reach your investment goals.
As different asset classes and segments perform well at different times, this fractional investment model is one of the key principles to ensure you won’t lose all your money if one sector or asset class fails to perform at a certain time – If you put all your money in stocks for example, you risk losing everything if the stock market crashes. Effectively, by not “putting all your eggs in the same basket” you won’t rely upon a single investment for all of your returns. The tactic simply aims to maximise returns safely by investing in assets that would react differently to a market event.
You can achieve a well-diversified portfolio by investing:
- across a range of various asset classes (cash, fixed interest, domestic and international shares);
- across different fund managers if investing in managed funds;
- in different industry sectors or companies (e.g., aviation and railway).
There are many benefits to portfolio diversification when trying to mitigate the risks of investment, some which include:
Lowering the risks
An unsystematic investment risk refers to a risk specific to a company, industry, market, economy, or country. During times of increased market volatility within a specific market, your share portfolio may experience loss of value. However, if you hold investments in other types of asset or industry sectors that may perform better from the same market event, these returns can help smooth out the negative effects of your overall investment portfolio value.
For example, if you have invested part of your portfolio in airline stocks and the aviation industry is affected negatively, causing a drop in your portfolio value, you can counteract this downturn by also investing in another industry. If you’re lucky enough to have invested in a mix of stocks and holding a few railway stocks as well, there is a very good chance that these stock prices would rise as commuters would turn to a different way of traveling.
By this example of diversification, the right combination of different industry segment or companies will reduce your portfolio’s sensitivity to adverse events to the market.
Generating returns, safely
It is to be understood that when investing heavily in instruments offering high return, you end up buying at a higher price. This means that, even though your investment would yield a significantly higher return if the market conditions were favourable, when judged on a risk-return basis the risk is as high as the return.
Therefore, diversifying your assets is often considered a core strategy in generating returns over time. This strategy may come with lower rewards because the risk is mitigated, but is effectively generating a bigger return in the long run for the same reason. Investments don’t always perform as expected, so by diversifying assets you are not merely relying upon one source for income.
Safeguarding your capital
All investors are different, and not everyone is ready to put all their funds a risk for a high return. Investors who are only years away from retirement or people who are new to investment are usually prone to follow a more safe and stable investment strategy.
With this tactic more novice investors are allowed to achieve their investment plans while maintaining the risk at a minimum. It is also a method of playing safe during times of market volatility. Discussions with a financial adviser may be of great assistance when exploring the risks in your investment strategy and the various diversification requirements as well as cash flow requirements.
Fractional Property Investing with DomaCom
The DomaCom Fund is an ASIC registered Managed Investment Scheme (MIS) that allows you to invest in one or more properties of your choice via a fractional investment structure. Investors can select any Australian properties to invest in. These include residential, commercial, rural, retail, industrial and resort/leisure property lists.
Our unique platform allows investors to diversify their portfolio by investing across a range of assets property types around Australia, from agricultural and rural to residential and commercial properties, rather than investing in a single asset class.
View some of our current property crowdfunding campaigns.
If you are not sure which investment option can work for you, contact us today if you need more information about our options.